Contract Assets and Liabilities ASC Topic 606 for the Construction

Companies can record them as assets or receivables on the balance sheet. The accounting treatment of retention funds is similar to accounts receivable. When companies deliver a service, they send an invoice to the customer.

In construction, production contracts can last years and have multiple, extended payments over that time. Contract terms commonly allow 30, 60, even 90 days or more to pay invoices. As a result, revenue recognition and cash management in construction real estate bookkeeping both carry special considerations. Contractors need precise tracking and reporting, as well as collection and cash-flow strategies. Most commonly, the retainage percentage is taken out of every progress payment in the construction process.

Where the Term Retention Originated From

In the construction business, everything comes down to the contract. The steps required in a project’s journey to completion are importation to how successful the project will be. As a commercial contractor myself, I have reviewed the invoices that he reluctantly gave me, and noticed… Let’s look at an example of recording and paying retention payable. We envision a world where no one in construction loses a night’s sleep over payment.

According to 2004 research on retainage by construction educator Dennis Bausman, PhD, at Clemson University, it’s very common for retainage to be held from contractors on a job. If it’s a private job, there’s an 85% chance that at least 5% will be withheld. Two out of every three subcontractors have https://www.scoopbyte.com/the-role-of-real-estate-bookkeeping-services-in-customers-finances/ 10% withheld from them, but only one out of three general contractors, architects, and construction managers have the same burden. Dawn Killough is a construction writer with over 20 years of experience with construction payments, from the perspectives of subcontractors and general contractors.

of Retention Money

These numerous, temporary cost centers are ultimately why contractors need to practice job costing. Despite it being commonly considered a “necessary evil”, the fact that retainage has remained to be a type of leverage vehicle for a full century is a credit to its effectiveness. Over the years it has been questioned and modified a number of times, and even today there are various other solutions presented as alternatives. However, most of these alternate solutions look to remedy the perceived disruption of cash flow from the withheld resources and effectively eliminate the financial incentive for project completion.

For instance, a company may use retained earnings to fund research and development projects to improve its market standing. Alternatively, they might purchase new equipment to reduce costs or increase efficiency. As submissions to the Murray Review noted, reliable payment has a major influence on a company’s reputation. And, let’s face it, reputation matters when it comes to winning big projects as well as attracting and retaining the best subcontractors to help build them. For retention funds, the accounting for the underlying revenues is similar to other contractual payments. However, the revenues related to these funds may be more complex to record.